Real-World Economics Review Blog

from Peter Radford

I suspect economic theorists are not alone in shunting to the side issues or phenomena that might upset the applecart.  But they appear to do it with a determination that other disciplines mind find somewhat alarming.  This is why I relentlessly and repeatedly mention Cause and his 1937 question about the existence of the firm.  It isn’t because I imagine that theories of the firm began in 1937, or that they are somehow restricted to a peculiar Anglo-Saxon view — Coase would have been an ideal advocate of such a view having spent his career on both sides of the Atlantic — but because he typifies the dilemma he raised.  He cannot quite accept the enormous ramifications of his question, and so he wanders off and tries to invent a reason for firms to exist that can be kluged together with the pre-existing purist view of marketplace superiority.  Firms, in the theoretical tradition born to help Coase out of the box of his own making,  are made out to be exceptions rather than the rule.

Well, when you have theorized utopian markets, how can any other phenomenon be anything other than a sullied alternative?  You’re stuck with trying to make everything else out to be a result of some mysterious “failure”.

Economists have done a wonderful job of hiding from the demons that reality might unleash and the damage such demons might wreak on their pristine imaginings. Read more…

from Dean Baker

We are still very much in the middle of the pandemic, with the U.S. seeing tens of thousands of new infections daily, and the world experiencing hundreds of thousands of new infections. However, it is not too early to look at areas where we need to reevaluate public policy, most importantly in financing the research and development of new drugs and vaccines.

The accepted wisdom in policy circles has been, that while the government can finance basic research, we need to rely on government-granted patent monopolies to pay for the actual development and testing of new drugs. The argument is that we want private companies to compete to develop new and better drugs, with the rents earned from their patent monopolies compensating them for the cost of research and testing, as well as compensating them for the risk that they will not develop a marketable drug.

The logic of this position relied on the claim that somehow government financing of the later stages of research and testing is essentially the same thing as throwing money in the toilet. Read more…

from David Ruccio

Mainstream economists and commentators, it seems, are worried that the global economy is going to come crashing down as a result of the COVID crisis. That’s why they’re willing now to consider the possibility that the current crisis is more than a normal recession, more serious even than the so-called Great Recession; in their view, it’s an economic depression.

That, at least, is the argument they present up front. But there’s something else going on, which haunts their analysis—that capitalism itself is now being called into question.

But before we get to that alarming specter, let’s take a look at the logic of their analysis about the current perils to the global economy—starting with the Washington Post columnist Robert J. Samuelson, who is basically taking his cues from a recent essay in Foreign Affairs by Carmen Reinhart and Vincent Reinhart.*

Their shared view is that the current slowdown is both more severe and more widespread than the crash of 2007-08, and the recovery will be much slower. Therefore, they argue, the COVID crisis represents the worst economic downturn since the Great Depression of the 1930s.

This is a big deal: mainstream economists and commentators are uneasy about invoking the term “economic depression.” Read more…

from Lars Syll

Why would an academic profession sanction the use of theories based on crassly unrealistic assumptions? It is not an intuitively attractive idea. One suspects that the underlying reason is: economists are, in the main, committed to the defense of propositions that cannot be generated by models based on realistic assumptions. For example, a long string of unrealistic assumptions are necessary to generate the desired conclusion that unregulated financial markets perform optimally …

Milton Friedman was not only an economist; he was an energetic conservative political activist as well. His positivist methodology made it possible for conservative economists to use an absurd set of assumptions that no one would accept as a reasonable description of real- world capitalism to generate wide-spread acceptance of the proposition that unregulated capitalism is an ideal system.

Economics may be an informative tool for research. But if its practitioners do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fulfill its task. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics like James Crotty — and yours truly — will continue to consider its ultimate arguments as a mixture of rather unhelpful metaphors and metaphysics. Read more…

from Erik Reinert and issue 92 of RWER

In complete contradiction to the ruling practice of the Marshall Plan at the time, Paul Samuelson started building what was to become Cold War economic theory with two articles in The Economic Journal in 1948 and 1949. Communism advanced under the utopian slogan “from each according to his ability, to each according to his needs”. With his renewed interpretation of David Ricardo, Paul Samuelson produced a counter-utopia: under the standard assumptions of neo-classical economics free trade would produce a tendency towards factor-price equalization: the prices of labor and capital would tend to equalize across the planet. This became the noble lie of the neo-classical economics and of neoliberalism as the West faced the evils of communism.

Today’s economists would naturally tend to believe that Cold War Economics – the theories that stood victorious after the 1989 Fall of the Berlin Wall – is part of a tradition that has ruled in economic science since David Ricardo’s 1817 book. However, recent n-gram technology has made it possible to illustrate how David Ricardo and his theory of “comparative advantage” were virtually neglected until the Cold War. Read more…

from Ann Pettifor and issue 92 of RWER

Today as the world endures the crisis of a global pandemic, “an old order is ending in convulsions”. So writes Rebecca Spang, historian of the French revolution in The Atlantic (Spang, 2020). In the 1790s, money, debt and the non-payment of taxes by France’s rentiers, played a critical role in revolutionizing France. Today purveyors of money and debt – creditors, investors and speculators – both avoid taxes and prey on a global economy radically weakened by the Great Financial Crisis and the policy response to the events of 2007-9. As a result, and unsurprisingly, the international economic system is  both unprepared for, and prone to increasingly frequent “convulsions”. COVID19 is but the latest, and will cause long-lasting economic damage. Above all, and according to Case and Deaton, COVID19 is expected to widen the US’s “already vast inequalities in health and income”.²

The “pillars” of the global economic system are fabricated on shaky, “liberal” foundations (see Pettifor, 2006, 2017a). It is an international system specifically designed to expand markets for creditors and investors; and to protect, above all others, the interests of private creditors. The most important foundations of the system are capital mobility, the marketisation of interest rates and exchange rates. The system is largely maintained by the world’s hegemon – the United States – which uses its role as issuer of the world’s reserve currency to protect the interests of private finance, in particular Wall Street. US monetary power is backed in turn by military power, used to maintain control over access to, or the denial of access to markets worldwide.

A central tenet of the system is that wherever possible, the policy autonomy of governments (whether democratic or not) must be constrained and subordinated to governance by those active in capital, goods and labour markets. The global system – its regulations and laws  – are thus largely governed by private authority.  Read more…

from  Norbert Häring

Developing countries are trying to contain the corona pandemic under the most adverse conditions. In the middle of this, the World Bank is proposing that the water supply of slum dwellers be cut off, if their landlords do not pay the water bill. It is an inhumane philosophy of development that is behind such monstrosities.

For about two decades, the World Bank’s philosophy has been “sustainable development”; “sustainable” in the sense of profitable in the long run. Wherever possible, development work should be carried out in partnership with private companies and their foundations, because only if some corporation can earn money sustainably from development policy will enough money flow in to make a lasting difference. The derivation from this is to privatize and commodify as much as possible, i.e. to make it a tradable commodity. Read more…

from Dean Baker

I have written before on the post-pandemic economy and how it should actually provide enormous opportunities, but it is worth clarifying a few points. First and most importantly, there is an important measurement issue with GDP that people will need to appreciate.

It is often said that GDP is not a good measure of well-being, we see this in a very big way in the post-pandemic period. It is likely that many of the changes in behavior forced by the pandemic, first and foremost telecommuting, will be enduring.

Most immediately, this will show up as a sharp drop in GDP. We will be consuming much less of the goods and services associated with commuting to and from work. This means that we will be driving less. That means we will be buying less gas and needing fewer cars, car parts, and car repair services. We’ll also need less auto insurance. In addition, there will be many fewer taxi or Uber trips, as well as trips on busses, trains, and other forms of public transportation. Read more…

from Peter Radford

A couple of things before we get started:  when I say that economics is not history, I mean exactly that.  Geology is not history either.  That is not the same as saying that economics ought pay no heed to history.  Let’s not get confused over that.  Economics is its own discipline with rules and territory that its exponents determine.  That might frustrate or annoy some of us who would like to think of it more broadly, but it’s up to us to find doors to open to help in that broadening.

Fortunately there are plenty of such doors because the current core of economics is rather narrow with respect to the full range of interesting topics or phenomena that appear to be economic.  In its endeavor to become a more formal activity economics has ceded swathes of territory to related fields of enquiry.   As I mentioned in the past couple of weeks, it has limited itself so that things like increasing returns are treated as novelties that periodically pop up  and need pressing back down so as not to cause a thorough re-thinking of its core principles.  The list of similar oddities is quite long and results, by and large, from the effort economists have put in to their relentless focus on market activities and their desire to hunt for the mysteries of hidden hands and so on.  Economists have, of course, every right to pursue this narrow and often sterile activity.  And there are many economists who diligently work away at investigating the oddities, although too many seem to want to bend their subject of study to obey the rules of the core rather than to state the more reasonable conclusion that the core itself needs a look at. Read more…

from Lars Syll

Being a true expert involves not only knowing stuff about the world but also knowing the limits of your knowledge and expertise. It requires, as psychologists say, both cognitive and metacognitive skills. The point is not that true experts should withhold their beliefs or that they should never speak with conviction. Some beliefs are better supported by the evidence than others, after all, and we should not hesitate to say so. The point is that true experts express themselves with the proper degree of confidence—meaning with a degree of confidence that’s justified given the evidence …

Epistemic humility is an intellectual virtue. It is grounded in the realization that our knowledge is always provisional and incomplete—and that it might require revision in light of new evidence. A lack of epistemic humility is a vice—and it can cause massive damage both in our private lives and in public policy …

It’s never been more important to learn to separate the wheat from the chaff—the experts who offer well-sourced information from the charlatans who offer little but misdirection. The latter are sadly common, in part because they are in greater demand on TV and in politics. It can be hard to tell who’s who. But paying attention to their confidence offers a clue. People who express themselves with extreme confidence without having access to relevant information and the experience and training required to process it can safely be classified among the charlatans until further notice.

Eric Angner

from James Galbraith and Jaehee Choi and issue 92 of RWER

In the years following World War II the division of labor between neoclassical micro- economics and pseudo-Keynesian macroeconomics was pioneered at MIT and disseminated worldwide from there. Macro held a narrow strip of economic territory: unemployment, inflation, interest rates and money supply, the business cycle, the rate of growth and their interrelations through the quantity theory, the Phillips Curve and Okun’s Law. The personal distribution of income fell squarely into the microeconomics of labor markets, governed by supply and demand for various levels of skill, alongside such ad hoc matters as firm-size effects, industry-specific labor rents, imperfect competition and efficiency wages. A theory of changing inequality was offered for developing countries by Simon Kuznets in 1955, positing a rise in inequalities in the early stages of development but a decline later on. For the rich,  the Kuznets evolution was supposedly complete, the Cobb-Douglas distribution theory with Hicks Neutral Technical change predicted stable functional shares, and national income accounts appeared to bear this out. So the functional distribution – the division between wages, profits and rent – was hardly spoken of. Read more…

from David Ruccio and issue 9 of RWER

Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili: 
Firms cannot afford a misalignment of their workers’ pay and productivity increases – the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the research staff of the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

Figure 5

Read more…

from Richard Koo and issue 92 of RWER

Income inequality has become one of the hottest and most controversial issues in economics not only in the developed world but also in China and elsewhere as well. Many are growing increasingly uncomfortable with the divide between the haves and the have-nots, especially after Thomas Piketty’s Capital in the 21^st Century² sparked a fresh debate on the optimal distribution of wealth, an issue that had been largely overlooked by the economics profession.

This paper argues that the determinants of income inequality changes depending on the stage of economic development. The three stages of industrialization identified for this purpose are: urbanizing era, when the economy has yet to reach the Lewis Turning Point (LTP), post-LTP maturing or golden era when the economy moves along an upward sloping labor supply curve, and pursued era, when the return on capital is higher abroad in emerging economies than at home. The LTP refers to the point at which urban factories have finally absorbed all the surplus rural labor. (In this essay, the term LTP is used only because it is a well-known expression for a specific point in a nation’s economic development; the use of this term does not refer to the model of economic growth proposed by Sir Arthur Lewis.)

At the advent of industrialization, most people are living in rural areas. Only the educated elite, who are very few in number, have the technical knowledge needed to produce and market goods. Families whose ancestors have lived on depressed farms for centuries have no such knowledge. Most of the gains during the initial stage of industrialization therefore go to the educated few, while the rest of the population simply provides labor for the industrialists. And with so many surplus workers in the countryside, worker wages remain depressed for decades until the LTP is reached.

Exhibit 1 illustrates this from the perspective of labor supply and demand. read more

from Jayati Ghosh and issue 93 of RWER

A global pandemic is a particularly bad time to be reminded of existing inequalities. But there is no doubt that the Covid-19 pandemic has highlighted the extent of inequalities between and within countries. Whatever may be the fond sentiments expressed by at least some global leaders, we are clearly not “all in this together”. It is true that in principle, a virus is no respecter of class or other socio-economic distinctions: it enters human hosts without checking for such attributes. And the rapid global spread of this particular virus has shown that it is no respecter of national borders either, which points to the more fundamental truth that as long as anyone anywhere has a contagious disease, everyone everywhere is under threat. This should have made it obvious that ensuring universal access to health care and prevention is not about compassion, but about the survival of all. Unfortunately, that obvious truth is still not adequately recognised, mainly because existing structures of authority and power imbalances ensure that the rich and powerful continue to be more protected from both health risks and material privation. Read more…

from Norbert Häring

Read more…

from Peter Radford

It seems appropriate to mention increasing returns today.  After all, this is the day on which several of our modern titans of industry are appearing before Congress to respond to the concerns raised by the gargantuan size that their respective businesses have grown to become.  The CEOs of Apple, Amazon, Google, and Facebook are all under the gun to defend the enormous clout that each wields in the modern marketplace.  Today is the culmination of a long investigation by Congress into the problems, or perceived problems, that these four companies represent.  Whatever the outcome the simple fact that the four are being clustered into one band of rogues taints them with an aura of indecency we normally associate with the pharmaceutical, banking, or tobacco industries.  That’s bad company to keep.

But back to increasing returns.

It’s one of those topics that economists like to tuck away and discuss out of the glare of public gaze. It represents a considerable challenge to the foundation of contemporary economics.  Economists love letting us know that they know about the potential various errors that might devastate the core of what they believe, but they equally love sweeping such anomalies under the rug so as not to have to re-invent their discipline. Read more…

from Dean Baker

The saving rate hit a record 25.7 percent level in the first quarter, indicating that few of the pandemic checks were spent

The Gross Domestic Product (GDP) shrank at a record 32.9 percent annual rate in the second quarter. While almost all the major categories of GDP fell sharply, a 43.5 percent drop in consumption of services was the largest factor, accounting for 22.9 percentage points of the drop in the quarter. Nonresidential fixed investment also fell sharply, dropping at a 27.0 percent annual rate. Residential investment fell at a 38.7 percent annual rate.

The plunge in service consumption was expected, since this was the segment of the economy hardest hit by the shutdowns. Within services, health care, food services and hotels, and recreation were the biggest factors reducing growth by 9.5 percentage points, 5.6 percentage points, and 4.7 percentage points, respectively.

Spending on health care services fell at a 62.7 percent annual rate in the quarter. This was due to people putting off a wide range of medical and dental checkups and procedures, which far more than offset the care needed by coronavirus patients. The annual rate of decline for food and hotel services was 81.2 percent and for recreation services 93.5 percent. Read more…

from David Ruccio

Read more…

from Lars Syll

In a word, Economics is an Impossible Science because by its own definition the determining conditions of the economy are not economic: they are “exogenous.” Supposedly a science of things, it is by definition without substance, being rather a mode of behavior: the application of scarce means to alternative ends so as to achieve the greatest possible satisfaction—neither means, ends, nor satisfaction substantially specified. Exogenous, however, is the culture, all those meanings, values, institutions, and structures, from gender roles, race relations, food preferences, and ethnicities, to technical inventions, legal regulations, political parties, etc., etc. The effect is a never-ending series of new theoretical breakthroughs, each an Economics du jour worthy of a Nobel prize, consisting of the discovery that some relevant little bit of the culture has something to do with it. Only to be soon superseded and forgotten since the continuous development and transformation of the culture, hence of the economy, leaves the Science in its wake. An impossible Science, by its own premises.

Marshall Sahlins

The increasing mathematization of economics has made mainstream economists more or less obsessed with formal, deductive-axiomatic models. Confronted with the critique that they do not solve real problems, they often react as Saint-Exupéry’s Great Geographer, who, in response to the questions posed by The Little Prince, says that he is too occupied with his scientific work to be able to say anything about reality. Read more…

from Dean Baker

I just finished reading Carter’s book and I will agree with the general assessment. It is an outstanding book that brings together much useful material on the life and influence of Keynes.

While I am of course familiar with Keynes’ history and the history of Keynesianism, there is much that I learned here. In particular, I am impressed with the importance he gives Joan Robinson in spreading the ideas of Keynes, especially to followers from the United States.

When I first start taking economics, I hugely appreciated Robinson’s writing. She both did very important analytic work, especially her pathbreaking analysis of imperfect competition, but was also tremendously witty in her popular writing. I will always remember her great comment on unemployment (paraphrasing): “The only thing worse than being exploited by capital is not being exploited by capital.”

Anyhow, I am happy to see her given the starring role in the spread of Keynesian thought, especially given that, as a woman, she had a huge amount to overcome in a field that was, and is, tremendously sexist. Read more…